Kenneth Macfarlane, Country Senior Partner, PwC: Interview

Interview: Kenneth Macfarlane

In your opinion, what is the feasibility of introducing new taxes to the sultanate in order to strengthen the country’s fiscal position? How will this affect the region?

KENNETH MACFARLANE: Indirect taxes could be a significant source of revenue for Oman. The issue has been on the table for some time and we understand that the government is ready to implement a value-added tax (VAT).

We understand that for ease of implementation and to prevent cross border leakage within the region, Oman may choose to wait for the UAE to announce their VAT implementation plans before following suit. Implementation by other GCC states, including the UAE, will maintain Oman’s competitiveness across the region.

Oman is also unique in that it is one of the few counties in the GCC that charges tax on business profits. In the highly developed free zones in the UAE, it is very common for foreign companies and investors to not pay taxes on business profits generated there. Therefore, Oman, being a taxing jurisdiction, is already in the minority when it comes to competitive advantage.

Looking at the country’s fiscal position, taxes and subsidies are relatively small compared to the public sector wage bill. This is unsustainable in the long run. Oman has the capacity to take on debt and is going to the international market to do so. Debt taken on to pay public sector wages as opposed to facilitating investment and growth would be cause for concern.

Recent studies undertaken by the IMF have stated that if the GCC countries are to progress towards more developed economies they should make a move towards implementing more indirect taxation. It appears that Oman is following this study and is prepared to implement indirect taxation when the conditions are right to do so.

What criteria do you think should be considered before new taxes are levied?

MACFARLANE: From a business point of view, there will obviously be compliance costs for all businesses in order to implement the VAT, which will may ultimately have to be passed on to the consumer. The GCC states have been considering a 3-5% VAT, but how much of an impact that will have remains to be seen. Here in Oman, the first OR30,000 ($77,670) of business profits is free from tax. It is a possibility that this exemption will be removed; out of the 20,000 registered companies in Oman, only 4000 pay tax. Additional revenues generated by removal of the exemption could be beneficial for the country. What needs to be considered carefully is the benefit to be gained from the revenue generated from a change in the tax regime, balanced against an increased administrative burden and the economic effect of taxing Oman’s corporations and small and medium-sized enterprises in hard economic times.

The sultanate’s free zones and special economic zones are only set to expand in the coming years, being major economic drivers for foreign direct investment (FDI). Therefore, it would be counter-intuitive to begin adding further obligations to companies established within these zones.

What investors need, coming into Oman, is clarity and a degree of certainty regarding the domestic tax regime. In turbulent times, the private sector will be reluctant to expand and invest more, and uncertainty about when, how, or to what extent taxes will increase will serve as an even bigger disincentive. In this regard, more dialogue and clarity between the government and the private sector will go a long way. Now is the time for Oman to work hard in order to attract more FDI, and to think carefully about the impact of short-term regulatory fixes on business.